Would a Federal Order in California Be Worth It?

California producers have long complained that their state order places them at a huge disadvantage to other states and regions with Federal Orders. The 2014 farm bill allows California to join the Federal Order System while retaining its quota system.

If not carefully crafted, a Federal Order in California could create unintended consequences, such as a gradual and eventual loss of cheese processing capacity, points out new analysis released this week.

John Newton, a dairy economist with the University of Illinois, posted the analysis March 27 on his farmdocdaily page. As in all things where Federal Milk Marketing Orders are concerned, it’s complicated.

Currently, the disparity in California and Federal Order pricing mechanisms mean California producers are often receiving at least $1/cwt less than farmers who market milk under Federal Orders. Much of that comes from the disparity between 4b California cheese prices and Federal Order Class III prices, which can differ by as much as $3.63/cwt. The average difference has been $1.43 from 2010 to 2013, says Newton.

And much of that comes from whey prices. California’s system caps the whey contribution to 75¢/cwt. The Federal Orders have no caps. During 2013, whey values contributed $2.30/cwt to the Class III price.

If the Federal Order system of price formulas is adopted, farm prices would likely rise. "Thus, if higher prices paid by California cheese processors manifest along the supply chain, cheese makers could become less competitive in milk procurement and product sales," says Newton. That, in turn, could cause a change in milk processing away from cheese into other products.

California’s quota, reportedly worth more than $1 billion, contributes as much as $1.70//cwt to quota owners. It’s not clear how quota would be handled under Federal Orders. But quotas coupled with less stringent pooling requirements could mean fewer dollars available for non-quota milk being shipped to pooling plants.